All posts tagged Hypo RE

The saga of Hypo Real Estate began a new chapter last Friday when it came to light that an accounting error at its bad bank would scrape €55.5 billion off the government’s debt, effectively enabling it to report a lower public-sector debt ratio to Brussels for this year and last.

So why is Finance Minister Wolfgang Schaeuble fuming?

While it seems like good news at first glance, the accounting mishap raises serious questions about the quality of the management of Hypo RE and its bad bank, FMS Management. Taxpayers, who have been footing the bill for losses at the operations, may also ask if supervisors have things under control at Hypo RE and the bad bank.

Hypo RE, a major holder of German covered bonds, was put under full government ownership in 2009 after initially requiring more than €150 billion in state guarantees and capital to keep it “afloat” during the financial crisis. It has since set up a bad bank, following substantial restructuring and downsizing, including the transfer of some €173 billion of non-strategic assets and derivatives that mainly hedge the transferred assets against interest-rate risk.

The accounting error happened because collateral for derivatives wasn’t netted between the asset and liability side. As a result, Hypo RE’s bad bank will only contribute around €161 billion to Germany’s debt this year, down from €216.5 billion in 2010.

Since the blunder emerged last week, the blame game has gone into full swing…